A Debt Management Plan (DMP) can be a helpful solution for those struggling to cope with debt. The purpose of a DMP is to make managing financial issues easier by allowing debtors to consolidate all of their qualifying debts under a single monthly payment plan.
Because a DMP can help you to get your personal finances back on track by making your debts more manageable, you may eventually find yourself in a position where you feel able to pay off your DMP early.
If you have reached this stage, or simply want to get a better understanding of how DMPs work before trying to arrange one, then read on to learn more about paying off a DMP early.
What is a Debt Management Plan?
A Debt Management Plan (or DMP) is a popular debt solution that allows you to combine your debts into one affordable monthly payment. Working with a DMP provider, you’ll establish what a realistic monthly payment might look like based on your regular income along with usual expenditures such as on your rent, mortgage, groceries and other essentials.
Once an agreement has been reached with your creditors, you will make monthly repayments to your DMP provider who will distribute the money. DMPs can be a really great way to both bring down your total debt, whilst showing your creditors that you are willing to compromise and work to prevent what you owe from lapsing into bad debt.
To learn more about exactly what Debt Management Plans are, who they’re suitable for and how you can get one, see our in-depth guide HERE.
Can you pay off a debt management plan early?
As a relatively flexible debt solution, it may be possible for some people to pay off a debt management plan early. Doing so can be of real benefit in certain cases, allowing you to clear your debts and start work on rebuilding your credit score. Anyone thinking about paying off a DMP early should be sure to only pay what they can afford, however. The key to a successful DMP is for debtors to be realistic and overstretching yourself to repay a DMP early could result in you falling back into debt again in the future.
Making changes to a DMP will of course be subject to the agreement of your creditors, the terms of any existing agreement and your financial capabilities, however two ways in which you might approach paying off a DMP early are:
- By increasing your monthly payments to decrease the term of your DMP; and
- By paying your DMP off early with a lump sum.
Increasing the value of monthly DMP payments
One way to decrease the term of a DMP is to increase your monthly payments in order to pay off the total sum sooner. When a DMP is first set up, a debtor will be asked for a statement indicating their monthly income and expenditures and this will help to form the basis of a monthly payment. For a DMP to be effective, this statement must be both comprehensive and accurate as it ought to provide a clear indication of how much surplus money a debtor can afford to repay to their creditors each month.
As DMPs last for several years, it is not uncommon for people’s financial situations to change during the course of the agreement. You may be promoted at work, change jobs altogether or otherwise find yourself with a higher salary and therefore more expendable income. In some cases, people find that they can make lifestyle changes that decrease their monthly expenditure and so leave them with more money left over to put towards a DMP. This might include things like making savings on a cheaper mobile phone contract or working out a lower budget for groceries.
If you find yourself in a more stable financial position during the course of a DMP, it may be helpful to review the situation with your DMP provider. If the changes result in a higher surplus that can be put towards paying off your debts, it could bring down the number of months in which you’ll need to pay into the Debt Management Plan.
Paying off a DMP early with a lump sum
Another potential way of bringing a DMP to an early end is by paying off the outstanding amount with a lump sum payment. This might be possible if, for example, you have received a redundancy payment or another windfall.
If you feel that you are in a position to make a lump sum repayment during a DMP, then as with increasing the value of any monthly payments you may find it helpful to discuss the situation with your DMP provider. If you can pay off your creditors in full then it may be possible to draw your DMP to a close at the point of repayment. If, however, your proposed lump sum payment will not cover the total debt then you may be advised to make a one-off part payment of your DMP to be spread evenly between your creditors. Note that this doesn’t mean they will each receive the same amount, as any lump sum part payment will be worked out using the same calculations used to determine your monthly payment to give each creditor a sum that reflects the percentage of your debt that they hold.
To give an example of how a lump sum part payment of a DMP could work, imagine that you owe one creditor £800 and another £200. If you are only able to make a lump sum payment of £500, that money may be divided so that the first creditor receives £400 (80% of the lump sum to reflect the 80% of your total debt figure that they hold), whilst the second creditor would receive £100. Whilst on face value it may seem more beneficial to repay the second creditor in full and eliminate the debt owed to them, doing so might may break the terms of your agreement and cause the larger creditor to take debt recovery action against you.
In some select circumstances, you may also be able to negotiate a partial settlement of your debts in return for your creditors writing off the remainder of your balance. This may only be possible for debtors who have a large sum available to them and there is no guarantee that any creditor will accept such a proposal. Despite this, some creditors may take the view that a reasonable sum of money at an earlier stage is more beneficial to them than a more drawn out repayment of the sum owed in full. Debtors should consult their DMP provider if they wish to make a partial settlement offer, as they will be uniquely placed to advise on whether you have a chance of success.
Keeping Realistic Expectations
As we’ve outlined in this guide, there are a number of ways in which debtors may be able to reduce the term of a Debt Management Plan by paying it off early. Doing so certainly has the potential to lift the burden of debt from your shoulders, but it’s important for debtors to be realistic when it comes to paying off a DMP early.
When increasing your monthly DMP repayments in order to bring forward the agreement’s end date, it can be easy to overstretch your budget and leave yourself with too little left over to pay for essentials and any additional costs such as dental fees or other medical bills that can crop up. Similarly, for those who have considered making a lump sum repayment, give any offer some thought before putting it to your creditors. If you receive a redundancy repayment, for instance, it might be helpful to recognise that the money is intended to tide you over until you’re back in work and so using it to clear your DMP debt could leave you struggling and potentially draw you back into the same cycle.